Careful inheritance tax planning is crucial for UK expats who want to leave wealth to their beneficiaries and ensure they aren’t exposed to potentially unnecessary tax liabilities.
In this inheritance tax planning guide for UK expats, we’ll explain the key strategies you can utilise to reduce the inheritance tax burden and maximise your estate’s value.
What You Will Learn
- What is inheritance tax planning, and why is it important?
- How does inheritance tax work, and what are the rates?
- What are the UK inheritance tax rules and regulations?
- What are the most efficient strategies for minimising inheritance tax?
What Is Inheritance Tax Planning?
When you pass away, a sizeable portion of your estate could be liable for inheritance tax (IHT). Inheritance tax planning aims to mitigate potential tax liabilities by implementing strategic measures that facilitate the efficient transfer of wealth to beneficiaries.
Why Is Inheritance Tax Planning Important?
Detailed and strategic inheritance tax planning plays a critical role in preserving wealth across generations. It enables you to:
- Maximise the value of assets passed on to your beneficiaries
- Minimise the inheritance tax burden
- Safeguard your assets from unnecessary or double taxation (if you possess assets in multiple jurisdictions)
How Does Inheritance Tax Work in the UK?
Inheritance tax is generally imposed on a decedent’s money, property, and possessions. In the UK, the application of IHT is contingent upon several factors, including:
- The value of the decedent’s estate: No IHT liability arises if the estate’s value is below the prescribed threshold—the nil-rate band, set at £325,000.
- The relationship between the decedent and beneficiaries: Your spouse or a civil partner is often exempt from IHT.
- The decedent’s residency status: As of April 2025, the UK has implemented a residency-based system defining which assets are liable for IHT.
In the UK, inheritance tax liability is settled from the deceased’s estate prior to the distribution to beneficiaries. The responsibility for arranging and paying IHT to His Majesty’s Revenue and Customs (HMRC) lies with the estate’s executor if a valid will exists. In the absence of a will, the duty is undertaken by the estate administrator.
IHT UK Rules
Familiarising yourself with the UK IHT rules and regulations enables you to make strategic inheritance expat tax planning decisions.
IHT Liability
Until 6 April 2025, the UK inheritance tax system operated under a domicile-based system. If an expat was considered a UK domicile, their worldwide assets were subject to the UK inheritance tax. Conversely, IHT would only apply to their UK situs assets if they weren’t domiciled.
On 6 April 2025, the UK transitioned from a domicile-based system to a regime focused on long-term residency, altering the criteria determining which assets are subject to UK inheritance tax.
Under new legislation, a UK expat is considered a UK long-term resident (LTR) if either of the following applies:
- They were a UK tax resident for the previous 10 consecutive years.
- They were a UK tax resident for a total of 10 years within the last 20 years.
If you haven’t lived in the UK for the past 20 years, you may not be required to spend 10 years outside of the UK to acquire non-LTR status. You can determine whether you’re still a long-term UK resident or not, based on how long you’ve previously lived in the UK:
| Number of Years in the UK | Number of Years After Which You Stop Being a Long-Term Resident |
|---|---|
| 10–13 years | Three years after moving abroad |
| 14 years | Four years after moving abroad |
| 15 years | Five years after moving abroad |
The long-term residency test resets if you return to the UK after 10 consecutive years of non-residence. In such cases, you would revert to the LTR status 10 years after returning to the UK.
Rates and Thresholds
The standard IHT rate in the UK is 40%. However, this rate may be reduced to 36% if at least 10% of the estate’s net value is donated to a charity through the individual’s will.
Your estate will not be liable for inheritance tax if:
- Your estate is valued below the £325,000 nil-rate band. The threshold can increase to £500,000 if you leave your primary residence to your children or grandchildren. In such a scenario, a taper applies, reducing the additional £175,000 by £1 for every £2 that the net value of the estate exceeds £2 million.
- You bequeath your entire estate to your spouse (or civil partner), a charity, or a community amateur sports club.
Assuming no estate planning measures are in place to reduce IHT liability, the following examples illustrate the potential tax exposure under different scenarios:
| Scenario | Estate Value | IHT Threshold | Taxable Amount | Taxes Due |
|---|---|---|---|---|
| No residence passed to direct descendants | £600,000 | £325,000 | £275,000 | £110,000 |
| Residence passed to direct descendants | £600,000 | £500,000 | £100,000 | £40,000 |
| Estate passed to your spouse or civil partner | £600,000 | £325,000 | £0 | £0 |
The Nil-Rate Band Rule
The nil-rate band (NRB) refers to the portion of an individual’s estate exempt from IHT. Currently, this includes a standard allowance of £325,000, with an additional £175,000 available under the residence nil-rate band (RNRB).
The UK government allows the transfer of any unused NRB from the deceased to their surviving spouse or civil partner. Where no portion of the NRB has been utilised, the full combined allowance—£325,000 and £175,000—may be transferred. This enables the surviving spouse or civil partner to potentially pass on up to £1 million free from inheritance tax.
Gifts
You may gift a portion of your estate to your beneficiaries without incurring inheritance tax liability by utilising potentially exempt transfers (PET). Whether or not IHT applies to a PET depends on:
- Your relationship with the recipient
- The gift’s value
- 7-year rule
If you die within seven years of giving a gift, inheritance tax will be imposed on the gift’s value. However, taper relief will be applied, reducing the tax liability in the following way:
| Number of Years Between Gift and Death | IHT Rate |
|---|---|
| 0–3 | 40% |
| 3–4 | 32% |
| 4–5 | 24% |
| 5–6 | 16% |
| 6–7 | 8% |
| 7+ | 0% |
The seven-year rule does not apply to gifts made to spouses or civil partners. Such transfers are seen as exempt transfers by the HMRC and can be made without incurring inheritance tax liability, provided that the recipients:
- Permanently live in the UK
- Are your legal spouse or civil partner
The rule also doesn’t apply to gifts made to political parties or charities.
Gifts with reservation of benefit, or GROB, are gifts you made but still benefit from, such as gifting a home to a family member without moving out or paying rent. Such gifts are counted toward your estate’s value and are subject to IHT.
The UK government provides a range of allowances that enable individuals to make gifts without incurring inheritance tax liabilities, such as:
- Annual exemption: You may gift up to £3,000 to one or multiple recipients in one tax year without the amount being included in their estate for inheritance tax purposes. Any unused portion of this exemption may be carried forward to the next tax year (limited to one year).
- Small gift allowance: You may present any individual with a gift that doesn’t exceed £250 in value, provided that no other gift allowance has been applied to that recipient within the same tax year.
- Gifts for weddings or civil partnerships: You can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to any other person IHT-free.
- Regular payments: Expenses such as paying rent for your child or supporting an elderly relative are considered normal expenditure out of income and are IHT-free, provided payments are made from surplus income and do not compromise your standard of living.
IHT Planning Guide: Efficient Strategies for Minimising UK Inheritance Tax
A lack of inheritance tax planning may limit the amount of wealth passed on to your beneficiaries. However, employing the following IHT-efficient strategies can help you reduce the IHT burden:
Gifting Strategically
A well-structured gifting strategy can reduce the value of your taxable estate. Depending on your goals and circumstances, you can:
- Regularly give up to £3,000 in annual gifts to one or more individuals to transfer wealth tax-free under the annual exemption.
- Fund established trusts with non-UK assets to remove those assets from your estate, provided the trust is appropriately structured and settled while you are not a long-term resident.
- Utilise PETs during your non-LTR window to pass on significant assets without incurring UK inheritance tax.
It is essential to maintain detailed records of all gifts made. In the event of your death, your estate administrator will need this documentation to determine which gifts qualify for available inheritance tax exemptions.
To optimise available reliefs and mitigate the risk of unintended tax implications, the process of gifting should be undertaken with careful planning and informed professional advice.
Engaging a qualified estate planning and tax specialist is essential to develop a bespoke strategy that fully utilises existing allowances and aligns with your estate planning goals.
Utilise Your Residency Status
If you’re not a long-term resident in the UK, only your UK situs assets are liable for IHT. This presents a strategic advantage for non-LTR expats, as it narrows the scope of assets subject to IHT.
By leveraging specialised estate planning services, non-LTR individuals can implement sophisticated wealth structuring strategies, such as utilising offshore trusts and international wrappers, to minimise or potentially mitigate their exposure to inheritance tax in the UK.
Donate a Portion of Your Estate to Charity
If charitable giving aligns with your broader legacy objectives, incorporating charitable donations into your estate planning strategy can be an effective means of mitigating inheritance tax liability. Donating at least 10% of your net estate reduces your inheritance tax liability by 4%—from 40% to 36%.
The term ”net estate” refers to the remaining value of an estate after applying all eligible exemptions and deductions intended to reduce the inheritance tax liability. Determining your net estate and evaluating the eligibility of donations for IHT relief can be complex. Engaging a qualified tax specialist is strongly recommended to ensure these matters are managed accurately and in your best interest.
Utilise Trusts
Trusts can help you reduce or eliminate IHT liability provided that the trust assets were:
- Placed in the trust while you held a non-UK domiciled status
- Overseas on the date of your death or when your rights to the trust ended
- Overseas on 30 October 2024
Provided these conditions are satisfied, trust assets will be excluded from your estate and, consequently, will not be subject to inheritance tax.
Various forms of trusts may be utilised for IHT mitigation, including:
- Discretionary trusts
- Excluded property trusts
- Loan trusts
Establishing trusts can also be an effective strategy for mitigating inheritance tax liabilities for expats with LTR status. Transfers of assets into a trust exceeding the nil-rate band are subject to a chargeable lifetime transfer tax of 20%. However, provided the settlor survives for a period of seven years from the date of the transfer, no further inheritance tax will be imposed on the assets held within the trust, effectively halving the inheritance tax bill.
Contribute to a Pension
Historically, pension funds have been deemed valuable estate planning tools as they typically didn’t incur inheritance tax charges, as opposed to individual savings accounts, which were subject to IHT.
However, as of 6 April 2027, new legislation will bring most pension schemes within the IHT net, significantly reducing the tax efficiency of pensions as an estate planning tool. Pension schemes such as defined benefit, defined contribution, SIPP, and QNUPS will become liable for IHT.
Given the uncertainties regarding these changes, it is essential to seek professional advice. Pension specialists at Titan Wealth International can provide tailored advice on whether continued pension contributions remain valuable for your estate planning objectives, or exploring alternative strategies may offer more tax-efficient outcomes under the revised IHT regime.
Take Out a Life Insurance Policy
The deadline for settling the IHT bill is six months after the individual has died, and the inheritance tax bill must generally be settled before probate can be granted.
If your estate lacks sufficient liquid assets, your executors may be forced to sell valuable, often appreciating assets—such as property, investments, artworks, or businesses—to fund the inheritance tax bill and to avoid penalties and interest imposed by the HMRC on the outstanding IHT debt.
Due to time constraints, liquidating immovable estate assets may result in sales below market value, further reducing your wealth.
To mitigate this risk, many expats take out a life insurance policy to cover the IHT bill. When correctly structured, especially if written “in trust”, the policy proceeds are distributed outside your estate for IHT purposes.
This ensures the policy funds are paid directly to the beneficiaries, providing liquidity and protecting the rest of your estate from forced liquidation.
Complimentary 15-Minute Inheritance Tax Planning Consultation
Speak with Titan Wealth International’s cross-border estate planning team and:
- Understand how the 2025 and 2027 IHT reforms impact your estate
- Discover trust and gifting strategies tailored to your residency status
- Receive personalised advice to protect your wealth for future generations
Key Takeaway
Strategic inheritance tax planning is crucial for all UK expats seeking to preserve and transfer the maximum possible value of their estate to their intended beneficiaries.
In this guide to inheritance tax planning, we’ve explained how IHT works and provided details on the current UK IHT provisions relevant to UK expats. Additionally, we’ve outlined the most effective strategies for minimising IHT liability, such as settling trusts or taking out life insurance policies.
To identify which inheritance tax mitigation strategy suits your circumstances the best, seek help from tax specialists.
Experts at Titan Wealth International can conduct a thorough assessment of your estate and devise a bespoke estate planning strategy that helps you mitigate inheritance tax and preserve your wealth.
